Module 8

MODULE 8

SETTLEMENT OF DISPUTES IN INTERNATIONAL TRADE

8.1 INTRODUCTION

The development of special arrangements to deal with disputes involving international trade
began in the middle of the last century and has now produced one of the most effective, as
well as one of the most important, systems of international dispute settlement. Thus, in
contrast to law of the sea disputes, which we have seen are subject to a system which came
into force in 1994, trade disputes can be dealt with through arrangements which have been
progressively refined, based on regional as well as general agreements. These arrangements
were made in many forms. Some sought the presence of arbitration clauses within the
framework of the treaty or the agreement. Other disputes between memebers of the WTO ,
were conferred to the dispute settlement system of the World Trade Organization (WTO). As
cross-border trade and investment increased rapidly through the 1990s, individual states as
well as public and private investors sought ways to adjudicate conflicts or alleged violations
of trade agreements. Over time, the international trading system has developed a number of
mechanisms to do this, depending on the type of dispute and the parties involved.The
authority of these supranational bodies is established by agreements such as bilateral
investment treaties and free trade agreements, or by membership in an international
organization such as the WTO. Parties agree to accept rulings, though, enforcement authority
and appeals processes vary.

8.2 TYPES OF DISPUTES

As trade flourished over the years, the number of disputes that cropped up was also
tremendous. The need of adjudication was a requisite. Thus, bodies were formed. Some arose
out of agrreements such as the WTO Agreement and others for the specific purpose such as
the rules of UNCITRAL.

These bodies broadly deal with two types of disputes: state-state, in which governments
challenge the trade policies of other governments, and investor-state, in which individual

investors file complaints against governments. When such a nation is a member of the WTO,
then the WTO’s Dispute Settlement Mechanism would come into place.

Most state-state disputes are adjudicated by the WTO if the states are members of the WTO.
The WTO is the primary body governing international trade. Each of its 164 members have
agreed to rules about trade policy, such as limiting tariffs and restricting subsidies. A member
can appeal to the WTO if it believes another member is violating those rules.

Several cases have been brought to light. These may include tariff violations, unfair trade
practises and may even seek to challenge policy measures implemented by the member
countries that go against the principles of the WTO.

The other variant are disutes in relation to Investors and the States. They are known as
investor-state dispute settlement (ISDS) cases. These disputes typically involve foreign
businesses claiming that a host government abused them by expropriating their assets,
discriminating against them, or involve unfair treatment.

8.3 TYPES OF REMEDIES OFFERED

In international trade, when drafting international contracts, the parties usually focus on the
terms of payment and expense but little attention to terms of dispute settlement. Thus, the
parties should be aware that the disagreements and disputes can arise at any time. Therefore,
in the process of concluding an international economic agreement, the parties should note the
provisions on the selection methods of dispute settlement if a dispute occurs. Currently, there
are 4 dispute resolution methods in international trade as follows: negotiation, mediation,
commercial arbitration and court.

Negotiation

Negotiation is a settlement method which is usually applied in international dispute
settlement. In particular, the parties discuss together, struggle, compromise and agree to settle
the dispute. The result of the negotiation is that the dispute could be resolve or not.
Negotiation is conducted in two ways: The two parties directly meet each other to discuss and
deal or one party submit complaint to the other party and the other party answers the
complaint.

Mediation

Mediation is the method of resolving dispute between the parties through the role of a third
party. Mediation can be accomplished by two ways: One is that the parties agree with each
other about mediation, the mediator will be designated and conduct the mediation without
following any rules of mediation. The second way is that the parties agree to conduct the
mediation under rules of a professional organization or one specific arbitration institution,
such as mediation rules of the International Chamber of Commerce (ICC).

Commercial arbitration

Arbitration is a method of dispute settlement arising in trade activities that are agreed
between the parties and carried out according to the order and proceedings. Presently, there
are two kinds of arbitration such as: ad hoc arbitration and permanent arbitration.

Court

The three dispute settlement methods above are voluntary in nature. They are different from
the dispute settlement in accordance with judicial procedures at court. The settlement of
dispute by court is to resolve dispute through the activities of the State tribunals. Therefore,
litigants in the dispute are often considered as a final solution to protect their legitimate
interests. Especially, when there is a conflict, the parties will choose the form of trade
negotiation or mediation rather than commercial arbitration or court.

8.4 DISPUTE SETTLEMENT MECHANISM OF WTO

The WTO is the main forum for setting the rules of international trade. In its tenures, it
has helped reduce barriers to trade in both goods and services and created a dispute
resolution system that has reduced the threat of trade wars. The WTO is responsible for
overseeing the rules of international trade. It facilitates trade negotiations among its
members, which have increased from 123 in 1994 to 164 in 2018. The organization also
monitors the implementation of those trade agreements, produces research on global
trade and economic policy, and serves as a forum for settling trade disputes between
nations. While the specifics of the WTO’s trade rules are hashed out in negotiations, the
organization is based on several founding principles. The most basic is a commitment to
openness, meaning reducing tariffs as well as limiting quotas, import bans, distorting
subsidies, and other barriers to trade. Another central plank is non-discrimination, in
which WTO members must treat trade from all other members equally. The WTO also

seeks transparency and predictability in trade-related regulations and promotes
international standards to give citizens, companies, and investors stability. And the WTO
is also committed, in principle, to giving less-developed countries greater flexibility and
accommodations to help them adjust to new rules. The WTO’s trade dispute mechanism
has been used extensively over the past two decades, helping to avoid unilateral
responses to disputes and potential trade wars. Since 1995, members have filed more
than five hundred disputes with the WTO. Most of these are settled in consultations or
by agreement before advancing to litigation.

Upon joining, all members agree to a dispute settlement mechanism in which WTO-
appointed trade experts can render binding judgments. When one member files a
complaint against another, the countries must first attempt to resolve the issue through
consultation, and only if that fails, is a panel chosen by the WTO’s Dispute Settlement
Body to hear the case. A panel’s recommendations, if not overturned on appeal, must be
implemented by the offending country. If the country fails to respond, the plaintiff can
then take targeted retaliatory measures, such as blocking imports or raising tariffs.

The United States is the most active participant in the system, having filed 116 complaints
and served as defendant in 136 cases. China has become a particular target for U.S.
policymakers, who have increasingly used the WTO process to challenge Chinese
government support for domestic industries, restrictions on imports, abuse of intellectual
property, and other state-led trade policies.

8.5 DISPUTE SETTLEMENT BY TRADE AGREEMENTS

Effective dispute settlement raises the value of trade agreements and the return on
governments’ investment in trade agreement negotiations. There are several methods which
can be used to ensure that these trade disputes are taken care of. The forum established by the
WTO is one such place, however, many agreements are made between parties. These
agreements often provide for dispute settlement clause. A lot of reforms are suggested by
way of better information on options, information on how ad hoc procedures work in
practice, and model rules providing alternatives to accommodate variation in the choices that
governments make to increase the efficacy of these agreements.

Today, more than ever, governments want to expand trade by negotiating regional trade
agreements (RTAs). The nuber of RTAs are at a significant rise. Dispute settlement and
enforcement mechanisms are essential to protecting the value of this investment. This article
presents three practical suggestions to help RTAs have more effective dispute settlement.

Regional trade agreements need functioning dispute settlement mechanisms – to ensure
compliance that delivers economic benefits as advertised; to resolve conflicts that could
otherwise lead to the RTA falling apart; and most of all, to deliver certainty that attracts
investment creating jobs and economic growth. Even if RTA parties don’t formally invoke
them, strong dispute settlement procedures provide valuable enforcement options and
enhance RTA credibility.

The core RTA benefit to be enforced is preferential market access for goods or services from
partners. RTAs of the last decade backloaded their most politically difficult, and most
valuable, tariff cuts or other preferential market access concessions. Soon, these deadlines
will fall due, and some RTA parties will fail to deliver on their promises. Their partners will
need to be able to enforce these deals.

RTA partners have often chosen to take trade disputes to the World Trade Organization
(WTO) – which is the only viable forum for disputes on trade remedies and other issues not
dealt with in RTAs. But, for issues covered by RTAs, the parties need to have the option of
using regional dispute settlement.

For formal dispute settlement, the parties need three core elements: institutions, an arbiter,
and procedures. They need dispute settlement institutions to manage the docket, hearings, and
expenses. They need a neutral panel or other arbiter to interpret and apply substantive
law governing their rights and obligations. They need predictable procedures that facilitate
settlement. The WTO has standing mechanisms for all three of these. RTA parties must
create equivalent processes on their own.

Most RTA parties have chosen not to have a standing secretariat and must organise the
resources to administer each RTA dispute as it arises.

RTA parties could also take a look at other international institutions that administer
international economic law disputes – the Permanent Court of Arbitration (PCA), the
International Centre for Settlement of Investment Disputes (ICSID), or even other specialist
arbitral institutions in particular cases. The PCA and ICSID secretariats have deep experience
in administering dispute processes, including the United Nations Commission on

International Trade Law (UNCITRAL) rules referred to in many RTAs. The PCA and ICSID
also have standing arrangements for facilities and staff to hold hearings in Europe, Asia,
Africa, and Latin America.

In the WTO, panels and the Appellate Body interpret and apply WTO law to the claims and
facts brought before them. Most RTA disputes concern non-compliance with RTA-only
obligations. WTO panels have no comparative advantage at interpreting non-WTO RTA-only
obligations on issues like labour rights, anti-corruption, or human rights; some WTO
members that believe such provisions do not belong in trade agreements may object to having
them interpreted and applied in a WTO process. Even if the dispute is about RTA tariff
treatment, non-RTA governments have a fundamental conflict of interest regarding such
preferences, and the RTA parties may not want them involved.

RTA negotiations let the parties make law that purposely diverges from WTO law. RTA
parties may not want their texts homologated to the WTO approach. Diversity of this sort
may lead to fragmentation of the law, but it may be what governments want. Dispute
Settlement Understanding procedures are predictable, well known, easily explained to
stakeholders, perceived as fair, and widely accepted. They were designed to avoid unilateral
blockage. RTA procedures vary; some provide for the full range of possible events, others are
less carefully drafted, and some allow blockage.

Dispute settlement negotiators for some RTAs have invented some significant innovations
that are worthy of study and perhaps adoption. Non-WTO features of RTAs, such as lack of
standing institutions, also call for non-WTO solutions.

8.6 COMMON THEMES OF DISPUTES

Even though disputes may vary, there are ertain themes that are common to most disputes.

1. Payment Terms

Offering payment terms as part of contract negotiations enables a company to be
competitive. In many situations, the benefit of winning a contract by offering payment terms
comes with the risk of being unable to collect the receivables from importers. When offering
payment terms, an exporter requests minimal advance payment, leaving a portion of the
contractual amount to be collected at a future date after the delivery on the contract has been
completed. Importers can obtain payment terms that are long enough for them to receive the

goods and inspect them. In some situations, an importer can argue that the quality of the
products or services provided do not meet the standards promised in the contract. Disputes in
contracts are not only caused by the quality of the goods and/or services provided, but also
could be due to: Delays on contract completion; Modifications to specifications without
consent of all parties; Failure to comply with verbal agreements that were not signed for on
the contract; Non-shipment or blockage at port due to change in laws or government.

2. Letter of Guarantee

While negotiating the contract, counterparties may require the issuance of letters of
guarantees and letters of credit as a method to secure themselves against non-compliance on
contractual terms. Disputes can arise in situations where the seller is performing as per the
contractual terms, however the buyer drew on the letter of guarantee to obtain additional
funds for liquidity purposes. This is known as a wrongful call.

3. Foreign Exchange Rates

In the international market, counterparties sign contracts in currencies other than their home
currency. In these situations, the buyer and/or the seller face foreign exchange (FX) risks.
The foreign market is unpredictable and swings in the FX rate are not uncommon. Every
percent move of the FX rate can result in an increase/decrease of the profit margin on the
contract. Disputes arise in situations where the currency of the buyer depreciates in value,
resulting in the buyer to pay significantly more in converted currency than anticipated on the
contract.

4. Documentation Error

Documents in trade such as the letter of credit, letter of guarantee, forward contracts, futures,
and others, can be subject to errors. A letter of credit, for example, is issued by the bank of
the importer and is used as a payment instrument. It has multiple conditions that must be
fulfilled by the exporter and verified by the bank prior to releasing the payment to the
exporter. An error on a letter of credit can have a direct impact on the bank releasing the
payment. Such discrepancies must be rectified so that the exporter receives payment when it
completes the performance on the contract. Resolving such discrepancies involves issuance
of amendments to the letters of credit.

8.7 CONCLUSION

Drafting Contracts to avoid Commercial disputes can be lengthy and costly. It is impossible
to foresee all the issues that could turn into a dispute, but taking proactive measures to
prepare should not be overlooked in the stages of negotiations. It is important to determine
how potential conflicts will be resolved. Having a clear and definitive dispute resolution plan
can reduce the time and cost involved in international litigation. It can also reinforce
confidence in the success of the transaction because it reduces uncertainties that make
investors nervous. Most often, disputes will arise from misunderstandings of contract terms.
The key to minimizing complications is to draft an arbitration agreement at the onset of
negotiations, before a conflict arises. Dispute Resolution while litigation has been the
traditional way of dealing with disputes, there are strong reasons to consider alternative
dispute resolution (ADR), such as reduced costs and decreasing the time to reach a resolution.
As a best practice, parties frequently enter arbitration agreements to predetermine the details
of how to resolve potential future disputes. Much attention is being turned to solving
international trade disputes using ADR methods. Alternative Dispute Resolution Methods
Alternative dispute resolution offers a means of settling disputes without resorting to
commercial litigation, aiming to resolve disputes in a way that is less expensive, faster and
more predictable than adversarial litigation processes. In arbitration, a neutral third party
known as an arbitrator works toward a resolution of the dispute. As with a contract, the result
of arbitration binds both parties and is enforceable by a court. The benefit of arbitration is
that it can be faster and cheaper than litigation. It is also likely to be more participatory and
easily understood than a court hearing. Arbitration becomes international when the parties in
conflict have their place of business in more than one country, when most commercial
obligations are conducted in another country or if the arbitration itself takes place in another
country. A conciliator helps conflicting parties avoid litigation by meeting with the parties
separately to determine each party’s dispute and needs. Conciliation is often seen as the
middle ground between arbitration and mediation. The conciliator’s goal is most often to
restore goodwill or repair a working relationship, usually through concessions. Unlike
arbitration, conciliation findings are not binding, no awards are offered and the conciliator
has no authority to call witnesses or request evidence. A mediator, with no vested interest in
the outcome of the mediation, facilitates discussions and settlement between the parties.
Unlike conciliation, in which the conciliator offers solutions, a mediator is more of a
facilitator. The mediator avoids offering proactive decisions, choosing instead to help

disputing parties come to a realistically acceptable agreement. As with arbitration clauses or
agreements, to proactively prepare for the risk of disputes, entrepreneurs can draft mediation
clauses into contracts. Unlike arbitration or court litigation, mediation is non-binding—there
is no winner or loser, and the parties are not bound by any decisions made by the mediator.
Benefits of Alternative Dispute Resolution Besides the cost and time advantages of ADR,
there are additional benefits. It offers a less formal and simplified forum in which conflicting
parties can negotiate, and it presents the possibility of a more flexible or creative decision. If
an organization is seeking an ADR institution to specify in a contract, attention must be paid
to the procedures and techniques they offer. Many international law experts will offer
services in these areas. Some can offer procedures and techniques such as negotiation,
mediation, conciliation and arbitration, whereas some may only offer services for arbitration.
In addition, some ADR organizations specialize their services for specific industry sectors.
Care must be taken to choose the right kind of organization to represent the services an
organization requires, as well as those who will have experience and expertise in its area of
business. Dispute resolution is an issue that parties may not like to think about when
beginning a business endeavour however, disputes can and do still arise. Negotiations are the
most effective means to mitigate the risks of international disputes. In the event of a dispute,
solid contracts that clearly outline the rights and obligations of trading parties will save a
company time and money. Contracts that include choices for dispute resolution methods can
salvage the business relationships which parties have worked so hard to cultivate.